Reliance Industries fined Rs 6,600 crore for KG-D6 output fall

NEW DELHI: The government has slapped a hefty penalty of about Rs 6,600 crore ($1.235 billion) on Reliance Industries for the steep fall in gas output from the KG-D6 block, sharply escalating the oil ministry's raging dispute with the Mukesh Ambani-controlled company.

The oil ministry sent a notice to Reliance Industries late on Wednesday, admonishing it for the decline in production and said the company had violated the production sharing contract (PSC) and wilfully drilled fewer wells than what it had committed in its approved plan, called the Amended Initial Development Plan (AIDP).

The company says unexpected geology caused the decline in production and data has established that drilling more wells would not help, but the oil ministry has firmly rejected this.

"This is to bring to your notice that you have failed to fulfil your obligations under the terms of the PSC and have deliberately and wilfully caused breaches, which have led to immense loss and prejudice to the government and the people of India. You have, over a period of time, failed to adhere to the terms of the PSC and have repeatedly failed to meet your targets under the PSC," the oil ministry said in the sternly worded notice.

The oil ministry spokesman declined comment while RIL did not respond to emailed queries. Exploration industry executives said the ministry's action would hit investment in the sector and force companies such as ONGC and GSPC, which operate blocks adjoining RIL's D6 block, to account for such an eventuality when they develop their fields.

RIL has had a rocky relationship with the Centre ever since Jaipal Reddy replaced Murli Deora as oil minister in January last year. Its approvals have been delayed; top company executives have had to wait for months to meet bureaucrats; and its proposed pricing formula for coal bed methane has not been cleared for a long time. The penalty of $1.235 billion has two components: $457 million for lower production in 2010-11, and $778 million for 2011-12 when output fell further.

Gas Output Likely to Dip Further

Gas production is expected to dip further in the current fiscal. The government wants to deduct the amount from Reliance's share of profit from the field as it feels the company should be punished for building excessive infrastructure, which is now idling. RIL executives say the same facilities will be fully utilised and help cut costs drastically when it develops 16 new discoveries in the same block.

Reliance Industries had initiated arbitration in November last year in anticipation of financial penalties for falling gas output. But the oil ministry rubbished the arbitration notice, saying it had not taken any adverse action. The company had argued that the PSC allows it to recover its entire investment from the sale of gas, independent of the actual production.

The ministry has a different view. "You have also failed to take any steps and efforts to achieve the targets of gas production envisaged in the approved AIDP and have been interested only to recover your costs. You have been instructed time and again ... to adhere to the commitments in terms of the approved AIDP. However, you have till date failed to satisfactorily respond and perform its obligations in terms of Good International Petroleum Industry Practices," it said.

The oil ministry allows companies to recover their investment from the sale of oil and gas they discover. If the company does not discover any oil or gas, it loses all the money. In the case of Reliance, the oil ministry says it has to restrict the recovery of costs.

"In the circumstances, the government has no other option but to restrict the recovery of costs incurred by you for the excess capacity created in block KG-DWN-98/3 and limiting such recovery of costs only to the extent of the infrastructure used by you for the production of gas." India's national auditor, the Comptroller and Auditor General (CAG), had earlier criticised the oil ministry for being too lenient with private oil companies such as Reliance Industries and Cairn India. The CAG, however, had not quantified the loss caused to the government in the D6 block.